Steffy: The about-face on mega-banks

Updated 12:40 pm, Saturday, August 4, 2012

Sandy Weill retired as Citibank chairman in 2006 and lives with his wife in Sonoma, Calif. In the year he retired, Weill made $50 million in salary and bonuses.

Sandy Weill retired as Citibank chairman in 2006 and lives with his wife in Sonoma, Calif. In the year he retired, Weill made $50 million in salary and bonuses.

Photo: Charlie Gesell

Steffy: The about-face on mega-banks

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Irony rarely gets served up more blatantly.

Last week on CNBC, former Citigroup Chairman Sandy Weill said he thinks the government should break up the big banks.

When asked if he now thought his crusade in the 1990s to create financial supermarkets like Citi was a mistake, Weill simply said: "The world has changed."

Indeed, and no one on Wall Street or in Washington did more to change it than Sandy Weill.

Changing it back, however, is another matter. A study released this week by the University of Houston's Bauer College of Business reminds us that the roots of the financial crisis run far deeper, and that many of the incentives driving Wall Street and its clients in corporate America have changed little.

Finance professors Latha Ramchand and Praveen Kumar found executives who presided over a merger in a given year earned about 5 percent more in that year than executives at similar companies that didn't merge.

Using a large sampling of major public companies and transactions from 1993 to 2006, Ramchand and Kumar determined that mergers and acquisitions financed with stock resulted in greater gains for the CEOs than deals done with cash.

"CEOs strategically use M&A activity to raise the level of their equity-based compensation," Ramchand and Kumar wrote.

Weill raised the practice of profiting from acquisitions to an art form.

Through a series of deals, Weill built one of the first Wall Street powerhouses, what became Shearson Lehman Brothers. Then, in the mid-1980s, he left and started over. He gained control of a small consumer lending operation in Baltimore and before long was gobbling up firms again, capping a buying spree of more than 100 companies with the acquisition of Salomon Brothers by Travelers, the big insurer.

But it still wasn't enough. Weill wanted to transform investment banking and he had a vision for how to do it. He would sell investments to the depositors of a commercial bank - one-stop shopping for all financial needs that he called "cross-selling."

More, more, more

There was only one catch: It was illegal. The Glass-Stegall Act, a Depression-era law, prevented commercial banks and brokerages from operating under one roof. It was designed to prevent brokerage firms from gambling with government-insured deposits.

Weill argued that Glass-Steagall was antiquated, that it was impeding growth and making U.S. financial services firms less competitive in the global market. With the help of the Clinton administration and key congressional allies like former Texas Sen. Phil Gramm, Weill got his way. The bipartisan law - Gramm Leach Bliley - shattered the Glass-Steagall restrictions, clearing the way for the merger of Travelers and Citibank and touching off a wave of Wall Street consolidation.

It quickly became a nightmare. Citi never recognized the financial benefits of cross-selling. Instead, it found itself at the center of every major Wall Street scandal - tainted research, Enron, WorldCom, subprime lending, credit-default swaps, auction-rate bonds - Citi was so big, there was no financial cookie jar in which it didn't get its hand caught.

Where money is made

But Weill, with only a mea culpa here or there, escaped largely unscathed, and in 2001 and 2002 alone he raked in $267 million in compensation, much of it through stock. In his final three years before retiring as chairman in 2006, Weill made $50 million in salary and bonuses alone.

Weill understood that the real money isn't made on Wall Street or in banking or even in rewriting laws. It's made on deals.

Citi's employees, its shareholders, Wall Street's reputation and even the economy of the entire world faltered in the wake of Weill's vision. Yet nothing affected the tens of billions that Weill himself amassed by the laying the foundation for so much devastation.

Congress, despite thousands of pages of reforms, still hasn't undone what he wrought. Weill neither apologizes nor admits a mistake. Instead, he offers a financial bon mot: The world has changed.

Actually, it hasn't changed nearly enough.

Loren Steffy, loren.steffy@chron.com, is the Chronicle's business columnist. His commentary appears Sundays, Wednesdays and Fridays. Follow him online at blog.chron.com/lorensteffy, www.facebook.com/LorenSteffypage and twitter.com/lsteffy.